Chapter 13 Offers Homeowners an Opportunity to Save Their Homes From Foreclosure.
A Chapter 13 bankruptcy enables individuals with regular income to develop a plan to repay all or part of their debts. It is also called a wage earner’s plan.
Under Chapter 13, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor’s current monthly income is less than the applicable state median, the plan will be for 3 years unless the court approves a longer period “for cause.”
If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for 5 years. In no case may a plan provide for payments over a period longer than 5 years. During this time the law forbids creditors from starting or continuing collection efforts.
Chapter 13 offers individuals a number of advantages over liquidation under Chapter 7. Perhaps most significantly, Chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still make all mortgage payments that come due during the Chapter 13 plan on time.
Another advantage of Chapter 13 is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the Chapter 13 plan. Doing this may lower the payments. Chapter 13 also has a special provision that protects third parties who are liable with the debtor on “consumer debts.” This provision may protect co-signers.
Finally, Chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a Chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under Chapter 13 protection.
Any individual, even if self-employed or operating an unincorporated business, is eligible for Chapter 13 relief as long as the individual’s unsecured debts are less than $360,475 and secured debts are less than $1,081,400. These amounts are adjusted periodically to reflect changes in the consumer price index.
An individual cannot file under Chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.
In addition, no individual may be a debtor under Chapter 13 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing.
There are exceptions in emergency situations or where the US trustee (or bankruptcy administrator) has determined that there are insufficient approved agencies to provide the required counseling. If a debt management plan is developed during required credit counseling, it must be filed with the court.
A Chapter 13 case begins by filing a petition with the bankruptcy court serving the area where the debtor has a domicile or residence. Unless the court orders otherwise, the debtor must also file with the court:
- Schedules of assets and liabilities
- A schedule of current income and expenditures
- A schedule of executory contracts and unexpired leases
- A statement of financial affairs
- A certificate of credit counseling
- A copy of any debt repayment plan developed through credit counseling
- Evidence of payment from employers, if any, received 60 days before filing
- A statement of monthly net income and any anticipated increase in income or expenses after filing
- A record of any interest the debtor has in federal or state-qualified education or tuition accounts.
The debtor must provide the Chapter 13 case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began). A husband and wife may file a joint petition or individual petitions. The official forms may be purchased at legal stationery stores or downloaded from the Internet. They are not available from the court.
The courts must charge a $242 case filing fee and a $39 miscellaneous administrative fee (as of November 1, 2011). Normally the fees must be paid to the clerk of the court upon filing. With the court’s permission, however, they may be paid in installments. The number of installments is limited to four, and the debtor must make the final installment no later than 120 days after filing the petition.
For cause shown, the court may extend the time of any installment, as long as the last installment is paid no later than 180 days after filing the petition. The debtor may also pay the $39 administrative fee in installments. If a joint petition is filed, only one filing fee and one administrative fee are charged. Failure to pay these fees may result in dismissal of the case.
To complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules, the debtor must compile the following information:
- A list of all creditors and the amounts and nature of their claims
- The source, amount, and frequency of the debtor’s income
- A list of all of the debtor’s property, and
- A detailed list of the debtor’s monthly living expenses, including
Married individuals must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files, the income and expenses of the non-filing spouse is required so that the court, the trustee and creditors can evaluate the household’s financial position.
When an individual files a Chapter 13 petition, an impartial trustee is appointed to administer the case. In some districts, the US trustee or bankruptcy administrator appoints a standing trustee to serve in all Chapter 13 cases. The Chapter 13 trustee both evaluates the case and serves as a disbursing agent, collecting payments from the debtor and making distributions to creditors.
Filing the petition under Chapter 13 “automatically stays” (stops) most collection actions against the debtor or the debtor’s property. Filing the petition does not, however, stay certain types of actions listed under 11 USC. § 362(b), and the stay may be effective only for a short time in some situations. The stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even make telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.
Chapter 13 also contains a special automatic stay provision that protects co-debtors. Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a “consumer debt” from any individual who is liable along with the debtor. Consumer debts are those incurred by an individual primarily for a personal, family, or household purpose.
Individuals may use a Chapter 13 proceeding to save their home from foreclosure. The automatic stay stops the foreclosure proceeding as soon as the individual files the Chapter 13 petition. The individual may then bring the past-due payments current over a reasonable period of time. Nevertheless, the debtor may still lose the home if the mortgage company completes the foreclosure sale under state law before the debtor files the petition. The debtor may also lose the home if he or she fails to make the regular mortgage payments that come due after the Chapter 13 filing.
Between 20 and 50 days after the debtor files the Chapter 13 petition, the Chapter 13 trustee will hold a meeting of creditors. If the US trustee or bankruptcy administrator schedules the meeting at a place that does not have regular US trustee or bankruptcy administrator staffing, the meeting may be held no more than 60 days after the debtor files.
During this meeting, the trustee places the debtor under oath, and both the trustee and creditors may ask questions. The debtor must attend the meeting and answer questions regarding his or her financial affairs and the proposed terms of the plan.
If a husband and wife file a joint petition, they both must attend the creditors’ meeting and answer questions. To preserve their independent judgment, bankruptcy judges are prohibited from attending the creditors’ meeting. The parties typically resolve problems with the plan either during or shortly after the creditors’ meeting. Generally, the debtor can avoid problems by making sure that the petition and plan are complete and accurate, and by consulting with the trustee prior to the meeting.
In a Chapter 13 case, to participate in distributions from the bankruptcy estate, unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors. A governmental unit, however, has 180 days from the date the case is filed file a proof of claim.
After the meeting of creditors, the debtor, the Chapter 13 trustee, and those creditors who wish to attend will come to court for a hearing on the debtor’s Chapter 13 repayment plan.
A Chapter 13 debtor is entitled to a discharge upon completion of all payments under the Chapter 13 plan so long as the debtor:
- Certifies (if applicable) that all domestic support obligations that came due prior to making such certification have been paid
- Has not received a discharge in a prior case filed within a certain time frame (two years for prior Chapter 13 cases and four years for prior Chapter 7, 11 and 12 cases)
- Has completed an approved course in financial management (if the trustee or bankruptcy administrator for the debtor’s district has determined that such courses are available to the debtor).
The court will not enter the discharge, however, until it determines, after notice and a hearing, that there is no reason to believe there is any pending proceeding that might give rise to a limitation on the debtor’s homestead exemption.
As a general rule, the discharge releases the debtor from all debts provided for by the plan or disallowed, with the exception of certain debts referenced in 11 USC. § 1328. Debts not discharged in Chapter 13 include:
- Certain long term obligations (such as a home mortgage)
- Debts for alimony or child support
- Certain taxes
- Debts for most government funded or guaranteed educational loans or benefit overpayments
- Debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs
- Debts for restitution or a criminal fine included in a sentence on the debtor’s conviction of a crime.
To the extent that they are not fully paid under the Chapter 13 plan, the debtor will still be responsible for these debts after the bankruptcy case has concluded. Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for restitution or damages awarded in a civil case for willful or malicious actions by the debtor that cause personal injury or death to a person will be discharged unless a creditor timely files and prevails in an action to have such debts declared nondischargeable.
The discharge in a Chapter 13 case is somewhat broader than in a Chapter 7 case. Debts dischargeable in a Chapter 13, but not in Chapter 7, include debts for willful and malicious injury to property (as opposed to a person), debts incurred to pay nondischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings.
After confirmation of a plan, circumstances may arise to prevent the debtor from completing the plan. In such situations, the debtor may ask the court to grant a hardship discharge. Generally, such a discharge is available only if:
- The debtor’s failure to complete plan payments is due to circumstances beyond the debtor’s control and through no fault of the debtor
- Creditors have received at least as much as they would have received in a Chapter 7 liquidation case; and
- Modification of the plan is not possible. Injury or illness that precludes employment sufficient to fund even a modified plan may serve as the basis for a hardship discharge.
The hardship discharge is more limited than the discharge described above and does not apply to any debts that are nondischargeable in a Chapter 7 case.
It is unlikely that you will be able to find a new mortgage while you are still in an active Chapter 13 payment plan. Even after your case is discharged, usually after making payments for five years or until all of your debts have been paid, you may have trouble obtaining a loan for at least a couple of years. This time between the end of your plan and when you can qualify for a loan is called “seasoning” in the mortgage business.
A bankruptcy filing will result in a serious derogatory mark on your credit profile, which will prevent you from qualifying for many loans, especially in today’s tight credit market. While I do not think it is impossible for you to find a loan, I expect that you have a lot of work ahead of you, and you should expect to pay a premium in interest and costs for any loan you are able to obtain.
In 2005 or 2006, I would have been much more optimistic about your prospects for finding a loan after your bankruptcy is complete, but the sub-prime mortgage market, which offers loans to individuals with credit problems, took a nosedive, making it much harder for borrowers with less than perfect credit to find a loan.
Your ability to qualify for a mortgage loan will depend on several factors aside from your credit score, including your income, your performance on other secured accounts, and the amount of money you have available for a down payment. Also, the positive payment history on your credit cards should help improve your overall credit worthiness. If you have a good income and a sizable down payment, you may be able to find a decent loan despite your bankruptcy and credit problems.
If you cannot find a loan that suits your needs, you may want to continue working on your credit score. The more you can increase your credit score, the better loan terms you should be able to obtain. Also, the more time that elapses, the less negative influence your bankruptcy filing should have on your credit rating, allowing your positive trade lines to exert a stronger influence on your overall credit rating. Because your credit score is just one piece of the puzzle, you also need steady income and a low debt-to-income ratio.
For an FHA loan, the applicant needs to show steady employment, a low debt-to-income ratio, a credit score of at least 580, and two years passage of time from a bankruptcy or foreclosure. However, these rules change, and to learn more about FHA loans, see FHA Mortgage Types.